Iran sanctions risk widening rift between the West and India & China

In the maelstrom of debate around Western oil sanctions on Iran, the impact on the two Asian giants, India and China, has inevitably figured. Commentators have pointed out that Asian markets are likely, in fact, to be the biggest beneficiaries of the EU’s decision this week to impose oil sanctions after July 1and similar US legislation being planned. According to the IEA, Iran exported about 600,000 barrels of oil a day to Europe and much of this will now be directed east, at discounts that have been estimated to reach up to 40%.

But to see the impact of sanctions purely in terms of market plays, fire sales and opportunism is to misunderstand the bigger and longer-term role Iran occupies in both India and China’s energy security policies – and how strategic such considerations are to political and economic decision makers.

These two countries are home to about 2.5 billion people, over a third of the world’s population, and have seen annual economic growth averaging over 5 percent in India’s case and 8 percent in China’s for much of the last two decades. With it has come growing dependence on oil imports. The drive of both countries towards development, the phenomenal rise of their middle classes and a corresponding reduction in poverty, depends in a very real sense on Middle Eastern petropolitics.

This has not been lost on Iran’s leadership. As international isolation grew, they increasingly sought to lock in India and China with long-term – 25-year – contracts for Iranian oil. Each of the two now imports something over half a million barrels of oil a day or Iranian heavy crude, a grade for which their refineries have now been specifically adapted.

Each country has also got involved in consideration of longer-term investment in Iran’s energy sector. As well as imports, India has been considering a project to import LNG, a pipeline which would run through Pakistan and deliver gas to both south Asian countries, and upstream investment in offshore gas. China’s CNPC and Sinopec both have multi-billion dollar upstream investments in country, mostly in gas.

The two countries of course have domestic political considerations as well. India’s equations are quite complex. It has to balance a traditional non-aligned political stance with a growing alliance with the USA, and as Prime Minister Manmohan Singh once pointed out, India has the second-largest Shia Muslim population in the world after Iran. Former deputy foreign minister Shashi Tharoor was forced to rebutt accusations that he was “cow-towing” to American interests when India voted against Iran at the International Atomic Energy Agency in 2009. In China too, relations with Iran, in defiance of the United States, form part and parcel of a more nationalist stance in politics and senior figures in the military establishment regularly issue bellicose rumbles to this effect.

But the ideological hue that different positions towards Iran take on are really just an outgrowth of something far more realpolitik, more fundamental to both countries – energy security. In 1980, India imported a third of its energy needs. Now it imports two thirds and estimates from the International Energy Agency suggest that by 2030 that will rise to 90%. To be sure, Indian politicians and energy companies are seeking to source energy anywhere and everywhere from Sakhalin to Sudan. But reliance on the Middle East is already high and given the projected increased dependence on the region for production globally will only rise. The path to a quality of life of what might then be a middle class half a billion strong, in Mumbai, Chennai and Delhi, across the conurbations of the sub-continent, lies through the Straits of Hormuz.

In China it’s a similar story. While Iran represents just ten percent of China’s energy needs if your economy is expanding at ten percent a year, and the social contract of your 60-year incumbent one party state relies on continued expansion, those supplies represent not the difference between a bull and a bear economy, but an intrinsic part of national security.

There are large constituencies of opinion across the political spectrum in Western countries who will have none of this: the pro-Israel lobby who see Iran’s nuclear program as an existential issue; those on the left who buy a populist version of environmentalism which simply fails to understand the importance of access to affordable energy – fossil fuel or not – to what Dambisa Moyo in her new book How the West Was Lost calls “the Rest”, the six billion people on the planet who live outside rich Western countries; those on the right for whom conflict with China may be as much a plus as a minus, especially in election season.

But we ignore these concerns at our peril. It is no coincidence that the Chinese navy recently announced the reversal of a long-standing policy not to build an intercontinental fleet. Where might such a fleet reach to? Well, it turns out that last month Beijing also started seriously discussing an offer to create a naval base in the Seychelles – the perfect staging post to reach the Gulf.

Natural resources have a long and proud tradition of conspiracy theories – with the rider of course that dozens of those theories are true. The CIA really did overthrow the government of Mossadegh in Iran in the 1950s after he nationalised the oil industry by using $100,000 to buy rent-a-mobs on the streets of Tehran to reinstate the Shah. Calouste Gulbenkian really did found a cabal which sat on Iraqi oil for decades, not producing it to keep prices up elsewhere.